Shares in aerospace and defense giant Raytheon Technologies (RTX -0.29%), advanced composites manufacturer Hexcel (HXL -0.03%), and multi-industry conglomerate Honeywell International (HON 0.22%) are in positive territory so far in 2022, with the former two up mid-teens and Honeywell up by low single digits. That makes them big winners compared to an S&P 500 index that's down 17.3% for the year.
However, now isn't the time to take profits because all three have plenty of potential to do very well in 2023. Here's a look at each.
1. Raytheon Technologies
The case for Raytheon is relatively simple to understand and comes in two parts. First, its commercial aerospace-focused businesses will benefit from an ongoing recovery in flight departures. Raytheon's two commercial aerospace-focused segments, Collins Aerospace and Pratt & Whitney, have significantly exceeded expectations this year. Still, there's potential for more growth in 2023 as the recovery to 2019 levels (and beyond) builds. That's excellent news for the aftermarket business.
Another key plus comes from the likelihood that the wide-body market will follow the narrow-body market recovery, as international travel follows the recovery in domestic travel. As Honeywell's CEO Darius Adamczyk noted on the company's last earnings call, "The aftermarket opportunity of wide-bodies to narrow-bodies are roughly three to one." Meanwhile, the original equipment market (OEM) will grow as Boeing and Airbus ramp up production.
Second, as unfortunate as the circumstances of it are, defense spending and interest in Raytheon's missiles and defense systems are picking up -- particularly for those used in the theater of conflict in Ukraine.
Management believes its defense business will grow at a mid-to-high single-digit annual rate to 2025. Throw in an improving supply chain environment (supply chain and labor shortages held back defense revenue in 2022), and there's plenty of scope for growth at Raytheon Technologies in 2023.
2. Hexcel
The advanced materials company's core market is commercial aerospace, where its most exciting long-term growth prospects lie. Hexcel's graphite composites offer a strength and weight advantage over traditional materials like aluminum -- a key plus in an industry where weight savings translate into significant long-term reductions in fuel costs. As such, Hexcel's composites are increasingly used on newer airplane models.
Putting this together, it's clear that Hexcel benefits from increased aircraft production at Airbus and Boeing -- in terms of total volumes and increased content per plane on newer aircraft. Given that Boeing has a backlog of 3,510 aircraft on its 737 planes alone and is only producing at a rate of 372 a year at present, there's plenty of growth potential. Meanwhile, Airbus has a backlog of about 7,300 aircraft.
The strength in its end-demand makes Hexcel one of the most exciting growth stocks to buy right now, and Wall Street analysts expect double-digit revenue growth for at least the next few years. Just as with Raytheon, Hexcel needs to overcome ongoing supply chain issues in 2023, but it's better to be in a position battling to execute on orders than it is to be struggling with end demand.
3. Honeywell International
The aerospace theme looms large in the investment case for Honeywell, too. Aerospace is its largest single business, and alongside Raytheon and General Electric, Honeywell's aerospace business is enjoying robust growth.
Meanwhile, its building technologies business operates in a market driven by sustainability concerns (its products help improve building efficiency, health, and carbon emissions), while its performance materials and technologies businesses benefit from increased investment in energy, refining, and sustainability.
It's not all plain sailing for the company, though. Its businesses with the strongest indirect exposure to consumer spending, such as e-commerce warehousing automation, and retail productivity solutions, are suffering and will face challenges in 2023.
Still, Honeywell is likely to end the year in better shape than it enters it. And with excellent long-term growth prospects coming from its strategic investment in areas like quantum computing, sustainable fuels, and avionics and propulsion systems for air taxis and drones , Honeywell's future looks bright over the near and long term.
